CAR FINANCING

Within the next few days, you will learn that August 2014 auto sales were once again robust. The US market is not yet at its apex, but it certainly is far removed from the dismal 10.4 million vehicle sales of 2009. When the year ends we should find a market with more than 16.5 million units sold.

Subprime Auto Loans

Fueling the sales increase are loans to millions of buyers that might otherwise not afford a new car without some easing of lending rules. These consumers do not have good credit, but their credit may still meet minimal lending requirements. For people with sub-standard credit and in need of a new car, the credit “easing” is certainly a welcome move.

Some media analysts, however, are worried that a subprime auto lending bubble is forming, similar to the housing bubble that caused the market to tumble in 2008, ushering in the Great Recession.

The New York Times Investigates

In July, the New York Times ran an article, “In a Subprime Bubble for Used Cars, Borrowers Pay Sky-High Rates,” where reporters took a look at the “new subprime boom” and shared horror stories of consumers who were qualified for auto loans, but eventually had their cars repossessed when they could not keep up with their payments. It was just one of a handful of stories in the past few months that have indicated an auto loan apocalypse may be imminent.

The alarm has been sounded, but not everyone is in agreement with the warning. Late last month the consumer and commercial data company, Equifax, Inc., issued a statement refuting the notion. In its monthly Economics Trend Commentary, two of its experts — Chief Economist Amy Crews Cutts and Deputy Chief Economist Dennis Carlson — arrived at a much different conclusion.

Equifax Consumer Credit Reports

The Equifax team assembled aggregate data derived from credit reports for more than 210 million consumers in the company’s own database. That information assessed the current state of subprime automotive lending with potential economic benefits considered.

The lending landscape today is not the same as it was in 2007 — both because lenders generally have a reduced appetite for risk and because regulatory scrutiny has increased, said Dennis Carlson, Deputy Chief Economist, Equifax. In this Commentary, we discuss why we believe that while the subprime lending segment needs to be monitored carefully the evidence at this time does not suggest there is a bubble forming.

Equifax backed up its claim with a seven-page report that chided the press for making rhetorical arguments without supporting those claims with facts. Further, Equifax defended the market, noting that “a fair and functioning “second-chance market” is necessary for a fully functioning economy.”

Without access to a car many people find it difficult to get a job as well as to get to a job. Moreover, a number of people with subprime credit may have lost their jobs and/or their homes during the Great Recession. Subprime lending allows them to get back on their feet and put their hardships behind them.

Loan Originations and Subprime Share

Equifax supported its claims with charts that underscored several important points, including the number of auto loan originations and the subprime share. That share today is more than 5 points lower than it was in 2007, just ahead of the last recession. Equifax measures subprime lending as a credit score under 640 points.

The percentage of auto loans that are at least 60 days past due comes in at just under 3 percent or slightly lower than the pace set in 2006 and 2007, but above the rate during the recession. Moreover, the loan write off rate is still lower than the years leading up to the Great Recession, demonstrating that defaults are under better control today. You can review a portable document file (pdf) of the report here.

The New York Fed Weighs In

Equifax is not alone in refuting stories of a pending subprime auto lending bubble. Earlier in Aug., Bloomberg Businessweek also examined the New York Times’ claims, then cited the findings of four New York Fed economists who had a different viewpoint. The Fed said, “We do not see evidence supporting a disproportionate or unusual volume of new loans being issued to riskier borrowers.”

A follow up blog article by the Fed on Aug. 14, 2014, did note an increase in subprime lending, but also found an increase in prime auto lending. Thus, the subprime share is “less pronounced” and the threat that some people see as looming still has a long way to go from reaching a tipping point.

You have been leasing your car for some time and are coming to the end of your lease term. Your mind is on what to do next, including whether to buy or lease your next vehicle. If you like your current car, you can keep it after the lease expires. Most leases include a “buy option,” one that allows you to purchase your leased car.

1. Review your paperwork. When you leased your car, you were given several pages of paperwork including a car lease agreement. That agreement spells out the terms of your lease and provides instructions on returning your car at the end of the lease term. It will also give you a dollar figure for what the car can be purchased for at the end of the lease term.

2. Get in touch with your dealer. Call the dealer where you leased your car and ask for the buy out price of the car. That price may differ from your lease agreement. If it comes in lower, you can take that amount or you may be able to negotiate a lower price. You can find out the current value of the car by visiting Kelley Blue Book and clicking on the link for “What Is My Car Worth?”. If the price comes in lower, use this information to negotiate a lower buy out price.

3. Arrange your financing. If you have cash to buy your leased car, then present a personal check to your dealer for the full amount. If you do not have cash, you can arrange financing to cover your loan. Your bank or credit union, or some other financing company, may extend a loan to you. Tarry Shebesta, president of Automobile Consumer Services Corp. recommends that you contact the bank that financed your lease and ask them for the buy out amount. He also recommends that you “get the phone number of the person in charge of making the decision” and explain that you would consider financing with them. Shebasta explains to Edmunds readers to make an offer and see if it is an amount that your lender can live with.

4. Make an appointment with your dealer. When your financing has been arranged and you have a check in hand, drive your vehicle to the dealer and complete your paperwork. If you are paying cash, you’ll give your dealer a personal check. If you are financing your vehicle, your lender will supply a business check to you.

5. Visit DMV. Once you have finalized your transaction, visit your department of motor vehicles and register your car. You will obtain updated registration and fresh tags. If you bought the car with your money, a title will be sent to your address. If you took out a loan to buy your car, the title will be sent to your lender who will hold a lien on it. Contact your insurance company and explain that you are keeping your leased vehicle. Update your insurance to reflect your current coverage needs.

Leasing Considerations

If you want to buy out your lease before the end of the lease term, that may not be a good idea advises Dr. Don Taylor writing for Bankrate.com. Consumers can find themselves upside down with a leased car, owing more on it than it is worth. Instead Taylor advises that you should wait until the end of the lease to exercise your buy option.